Private equity’s Amazon problem

Once thought to be a prime buyout candidate, Nordstrom is now reportedly having trouble securing debt commitments for a would-be deal. It opted last week to wait until after the holiday season to assess a PE buyout, despite having an interested investor waiting in the wings (Leonard Green & Partners), per various news sources.

Following the bankruptcy of Toys R Us, another PE-backed retailer, the Nordstrom story says less about the credit market and more about private equity’s place in retail. Earlier this year, a CNBC story noted that half of all 2017 retail bankruptcies were filed by companies owned, at least in part, by private equity. CNBC pointed to changes in the bankruptcy code in 2005 as a key reason for the increase: The law used to give bankruptcy filings up to 18 months to reorganize, but the law now limits that runway to 210 days.

But how big of a difference should that really make to private equity? Would the extra months solve its woes in retail, or just postpone them? For an industry that prides itself on being ahead of the curve and finding value in distress, it’s worth asking whether private equity missed the massive Jeff Bezos-led transformation that is underway in the consumer sector
(see the graphic
below).

Retail as a whole is in distress, which is another situation entirely. The traditional PE model seems to be stalling in today’s market, and leverage isn’t an elixir when the industry itself is being redefined.

click to enlarge (Source: PitchBook)

Other retail investors are quickly readjusting. While overall US PE retail activity is set for a big dip this year, activity in the ecommerce space is alive and well, already notching
a record this year in terms of deal value, per the PitchBook Platform. Specialist consumer investors have been quicker to adjust to the changing landscape, but it’s hard to imagine generalist PE firms will catch up as quickly; Amazon has been laying the groundwork for disruption for over a decade, and it will take additional time for the post-Amazon dust to settle. For once, private equity has been relegated to the backseat, and troubled industries are taking cues from one of their own instead.